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December 5, 2012 9:38 pm
Deutsche Bank failed to recognise up to $12bn of paper losses during the financial crisis, helping the bank avoid a government bail-out, three former bank employees have alleged in complaints to US regulators.
The three complaints, made to regulators including the US Securities and Exchange Commission, claim that Deutsche misvalued a giant position in derivatives structures known as leveraged super senior trades, according to people familiar with the complaints.
All three allege that if Deutsche had accounted properly for its positions – worth $130bn on a notional level – its capital would have fallen to dangerous levels during the financial crisis and it might have required a government bail-out to survive.
Instead, they allege, the bank’s traders – with the knowledge of senior executives – avoided recording “mark-to-market”, or paper, losses during the unprecedented turmoil in credit markets in 2007-2009.
Two of the former employees allege that Deutsche mismarked the value of insurance provided in 2009 by Warren Buffett’s Berkshire Hathaway on some of the positions. The existence of these arrangements has not been previously disclosed.
Deutsche said in a statement that the allegations were more than two and a half years old and were publicly reported in June 2011. It added that they had been the subject of “a careful and thorough investigation”, and were “wholly unfounded”.
The bank said the investigation revealed that the allegations “stem from people without personal knowledge of, or responsibility for, key facts and information”. Deutsche promised “to continue to co-operate fully with the SEC’s investigation of this matter”.
The complaints were made at different times in 2010 and 2011 independently of each other. All of the men spent hours with SEC enforcement attorneys and provided internal bank documents during multiple meetings, people familiar with the matter say.
Robert Khuzami, head of enforcement at the SEC, has recused himself from all Deutsche Bank investigations because he was Deutsche’s general counsel for the Americas from 2004 to 2009. Dick Walker, Deutsche’s general counsel, is a former head of enforcement at the SEC. The SEC declined to comment on the investigation.
Two of the former Deutsche employees have alleged they were pushed out of the bank as a result of reporting their concerns internally.
One of them, Eric Ben-Artzi, a risk manager at Deutsche, was fired three days after submitting a complaint to the SEC. In a separate complaint to the Department of Labor, he claims his dismissal was retaliation for his allegations.
Matthew Simpson, a senior trader at Deutsche, also left the company after submitting his own complaint to the SEC. Mr Simpson declined to comment. Deutsche Bank paid Mr Simpson $900,000 to settle his anti-retaliation lawsuit. Reuters reported in June 2011 that Mr Simpson had raised concerns about improper valuation of the derivatives portfolio.
The third complainant, who worked in risk management and has requested anonymity, raised his concerns to the SEC and voluntarily left the bank.
William Johnson, a former assistant US attorney, with the law firm Fried Frank, was hired by Deutsche to conduct an investigation which has now been closed.
The complainants allege that the bank misvalued the positions by failing to account for losses it faced when the market worsened. Had the proper valuations been made on the positions during the tumultuous period, they allege, the losses for the whole portfolio would have exceeded $4bn and could have risen to as much as $12bn.
“Self preservation can be a powerful motivator,” said Jordan Thomas, head of the whistleblower practice at the law firm Labaton Sucharow, who is representing Mr Ben-Artzi.
“During the financial crisis, many financial institutions faced an existential threat and the evidence suggests that Deutsche Bank crossed the line by substantially inflating the value of its credit derivatives portfolio – the largest risk area in its trading book.”
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